Monthly Archives: May 2009

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I’ve had a case of creeping death in my throat for a week now. It was bad last Wednesday, went away so i could go diving, came back on Saturday, faded from one side of my throat, only to reappear on the other. Guess it’s clearing up now… slightly concerned that it’s going to come back for a repeat performance. Maybe it’s Swine Flu!

Feeling rather happy that i haven’t had to talk to anyone all week.

Fortunately work on features for the next product release have wrapped up, and i’ve been able to take it easier this week. However, i really need to get out and take some pictures… “things” are getting a little tight for time now. Can’t believe how much i’ve had to work so far this year, it has been pretty much flat-out for months.

It has begun. Today equities fell significantly and the “safe haven” bid was not large enough to overcome a deluge of selling. Yields rose. Again. This is not likely to be an isolated incident. This while happen with greater frequency and increasingly disruptive consequences.

Hmm. I’m still not convinced. There was a huge auction of 7 year bonds today, which might have distorted the market. For sure there is a lot of stress in the bond markets due to amazing volume of government debt… but one swallow doesn’t make a summer, and all that.

Giddy talk of “green shoots” has completely drowned out a more sober and rational assessment of the global situation. Random statistical noise in various minor economic indicators have over the past two months resulted in wild exclamations of “the worst is definitely over”.

It most certainly is not.

Yet another blog worth following as we mosey along in this wicker basket… can you smell sulphur? Perhaps it’s just me.

Update: I was wrong about the 7 year auction being yesterday, it was today. Yesterday was an auction of 2 and 5 years. The 7 year auction went off smoothly. More evidence for continued randomness rather than being at the point of systemic collapse. In theory the short end of the bond market should be more resilient than the long end… patience!

Can never really get enough of Jonathan Meades. While trying to find out if he was working on a new series for this year, stumbled upon this little collection of pieces at the New Statesman.

The Slow Food movement has an almost millenarian belief in the virtue of amalgamating gastronomy with ecology. It will take more than such utopian thinking, however, to transform Britain’s woeful food culture

China’s official foreign exchange manager is still buying record amounts of US government bonds, in spite of Beijing’s increasingly vocal fear of a dollar collapse, according to officials and analysts.

Senior Chinese officials, including Wen Jiabao, the premier, have repeatedly signalled concern that US policies could lead to a collapse in the dollar and global inflation.

But Chinese and western officials in Beijing said China was caught in a “dollar trap” and has little choice but to keep pouring the bulk of its growing reserves into the US Treasury, which remains the only market big enough and liquid enough to support its huge purchases.

There has been more bond talk[1] this weekend. The following rather cryptic (in my opinion) Reuters wire snippet has a lot of people worrying:

[11:41 US GOVTS: Real Money Using Coupon Passes To Exit; FM Blast]

Boston, May 21. There apparently is a new wrinkle to the intermediation trade between buying from Treasury to sell to the Fed with real money, including central banks, now in on the act. Indeed, several Street sources relay central banks were aggressive offers into this morning’s coupon pass, with one letting go of a large block of old 5-years. Other offers too are coming in from embedded Asian real money longs — in the higher coupons — also looking to sell size without unduly upsetting the market, and especially considering the illiquidity in off- the-run bids from the Street.

Which pretty much says that central banks (European and Asian) are using the US Treasury’s bond auctions to dump existing holdings. Meaning that they are getting creative at dumping long term treasuries, without unduly freaking the market.

If Foreign Central Banks are selling into Ben’s bid then the game is literally weeks or even days away from being over.

I have written for over a year about the potential for a bond-market implosion and subsequent economic collapse.

and i can see why he might think that… if the real money is looking for the exits, the Fed will be left holding all the long term (10 to 30 year?) debt, with the rest of the world closing out at short-end.

However, i don’t think this game is going to play out in the suddenly apocalyptic fashion that people like Denninger (and many like him) fear. The holders of these bonds (mostly China, Japan, and other asian central banks) know that if they crash the dollar, debt they hold is going to be worthless. My guess is that they are going to push this as far as they can without actually letting it break. Over time they’ll push the yield higher and higher, hoping that they can bleed America dry without actually sending it into cardiac arrest.

If you’ve been watching the yield on the ten and thirty year you’ll see that they are still heading up. And that has to be halted or it’ll set off a next wave of defaults in the housing market… certainly agree with the question, “So now what Ben?”

As an aside, there are a bunch of stories[2] out there about the rating agencies (S&P, Moodys, Fitch, etc) downgrading the national debts of the US, UK, and Japan. This looks like a side- show to me – these are the same clowns who stuck AAA ratings on MBSs, and obviously don’t understand that Japan doesn’t give a flying about it’s debt rating because it’s not borrowing externally… ignore it, and keep an eye on that bond yield!

For quite some time i’ve been looking for economic data on Japan. Much of the analysis written by western commentators is interesting, but often written with a sense of puzzlement, which is exactly what i’m attempting to overcome. There is also a tendency to attempt to tell Japan what it is doing wrong. This has run both ways, during the bubble there were no shortage of column inches / books describing the miracle… we all love a winner – right up until the hustle is revealed.

A few days ago i stumbled up the Japan Economy Watch blog. It’s put together by three non-japanese, is very data heavy, and appears to be well sourced / researched. I’m not going to tell you it’s great because i haven’t read through all of it, and certainly haven’t reached any new conclusions.

What prompted this renewed interest in Japan was last weeks reported fall in GDP:

There is no way to sugar coat the first quarter Japanese gross domestic product figures released on Wednesday: they are breathtakingly bad viewed from virtually any angle.

The economy shrank by a record four percent in the quarter, or an annualized fall of 15.2 percent, leaving the economy no bigger in real terms than it was in 2003.

The above quote, from Forbes, left me pretty confused. I was here in 2003, and i’ll be honest, it wasn’t much different from now. There might be a few less people on the trains, but the ridership numbers for my line are still increasing. There might be a few less people in Shibuya, sometimes you can catch a glimpse of the pavement… Which isn’t to say that it’s sensible to judge the economy of a country based on a couple of observations in the capital, but the impression that quote gives is that homeless should be lining the streets (yes, there are more than there were 5 years ago), soup kitchens, street urchins running through black snow without shoes on, etc. Er, no.

[I don’t seem to know how to link directly to graphs… look at both the linear and log versions, they are revealing.]

What i take away from that comparison is that, over the last ~40 years both the UK and Japan have done a lot better than the US in terms of increasing GDP per capita, and that the growth in US GDP is clearly unsustainable. Any graph that shape (exponential increase) is inevitably going to be run into limits. Looking at the population graph over the same period, it make sense why the US has felt the need to push for a larger economy – it has more mouths to feed.

It’s not clear to me what is leading indicator: allowing the population to increase rapidly, causes the GDP to increase rapidly, or the rapidly increasing GDP, allows the population to rapidly increase. And, there is always the argument that the two are unrelated… but it’s hard for me to take seriously.

This raises an interesting question: is Japan so horribly worse off than it was in 2003? The population is indeed older, and therefore less people are supporting the aged, so it can hardly be an improvement. However, i’m having a hardtime seeing it as being a massive hardship to be back where things were 5 years ago.

The real problems in Japan are things like the construction state, the corrupt bureaucracy, the reliance on fossil fuels for 80% of energy, the loss of ability to feed itself, it’s poisoned relationships with the rest of asia. As far as i can see an increasing population let the government hide from all these issues, but now they are going to be bought into stark relief. Unfortunately there is very little chance of the much needed radical change happening in the absence of disaster.

I keep telling myself that (intellectually) this is a great time to be alive – we’re going to see if humanity is up to the challenge of sustaining itself in a much more constrained world. The planet really has got a good deal smaller with so many of us camped out here…

Update: Hmm. The data doesn’t immediately support my hypothesis. That’s a shame. Now i’m reduced to trying to find income distribution data for Japan (the US is easy, and obviously a basket case: http://www.lcurve.org/). First two papers two read: